SOHU

Sohu.com Inc. (SOHU)

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Sohu.com Inc. (SOHU)

Q2 2011 Earnings Call

August 1, 2011 8:30 AM ET

Executives

Jenny Wu – IR

Charles Zhang – Chairman and CEO

Belinda Wang – Co-President and COO

Carol Yu – Co-President and CFO

Analysts

Dick Wei – JP Morgan

Ming Zhao – Standard Chartered

Ming Zhao – Susquehanna Financial Group

Wallace Cheung – Credit Suisse

Julian Cheung – Morgan Stanley

Catherine Leung – Goldman Sachs

Gary Ngan – UBS

Wendy Huang – RBS Capital Markets

Muzhi Li – Mizuho Securities

Jiong Shao – Macquarie Capital Securities

Eddie Leung – Merrill Lynch

Presentation

Operator

Ladies and gentlemen, thank you for standing by and good evening. Thank you for joining Sohu’s Second Quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. After the management’s prepared remarks, there will be a Q&A session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host for today’s conference call, Jenny Wu from Christensen. Please go ahead, madam.

Jenny Wu

Thank you, operator, and thank you for joining us today to discuss Sohu.com’s second quarter 2011 results. On the call today are Chairman and Chief Executive Officer, Dr. Charles Zhang; Co-President and Chief Operating Officer, Belinda Wang; Co-President and Chief Financial Officer, Carol Yu; Chief Technology Officer of Sohu and CEO of Sogou, Xiaochuan Wang; Vice President of Sohu and CEO of Sohu Video, Ye Deng. Also with us from Changyou are Chief Executive Officer, Tao Wang; President and Chief Operating Officer, Dewen Chen; and Chief Financial Officer, Alex Ho.

Before management begins their prepared remarks, I would like to remind you of the company’s Safe Harbor statement in connection with today’s conference call. Except for the historical information contained herein, the matters discussed in this conference call are forward-looking statements. These statements are based on current plans, estimates, and projections. And therefore you should not place undue reliance on them.

Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission, including its registration statements and most recent Annual Report on Form 10-K.

Now, let me turn the call over to Dr. Charles Zhang, Chairman and CEO. Charles, please proceed.

Charles Zhang

Thank you. Today I would like to start off with my congratulations to our online gaming subsidiary, Changyou. And both excited and for report that on July 22nd, Changyou launched Duke of Mount Deer or DMD, its second in-house developed game. The unique technological innovations brought by the four years of development have been well received by players. Since its launch, the games user base has grown steadily and we have already had to add more servers for the game.

Now with our flagship game Tian Long Ba Bu, and the acquisition of the 7Road, a web-based game company in China, and the newly launched DMD Changyou has successfully transformed itself into a diversified gaming company and escalated its leading position in China’s online gaming industry. I’ll go into more details later on this call. For the second quarter, I am pleased to report strong financial results as we’ve set a new record for total revenue which was supported by our record high revenues in three of our core business lines, brand ads, Sogou, and Changyou.

In addition to Changyou, both our online video and the Sogou businesses also posted solid results. Sohu Video, outperformed its large competitors and expanding its audience rich while Sogou accelerated its growth with over 250% top line growth driven by a strong improvement in search traffic and in monetization. I’d like to start with some quarterly highlights. Total revenue were US$199 million in the second quarter, up 36% year-over-year and 14% quarter-over-quarter. Growth on brand ad revenue before tax were US$74 million.

Net online brand advertising revenues were US$68 million, up 27% year-over-year and 19% quarter-over-quarter exceeding the high-end of our expectations. SoGou’s revenues were at US$13.6 million, up 252% year-over-year and 71% quarter-over-quarter, this compared with the US$11 million that we provided in our guidance. Online gaming revenues reached US$102 million surpassing the US$100 million mark, up 31% year-over-year and 7% quarter-over-quarter, exceeding the high-end of our expectations.

Non-GAAP diluted EPS were $1.21, compared with $0.96 in the second quarter of 2010, which is also ahead of our expectations. Now I would like to discuss our online video business in more detail. In the second quarter, we saw over 150% increase in revenue from online video, making it as the fastest growing area in our brand ad business. It continued to broaden our viewer coverage and to solidify our position as one of the top three players in the market, as we further narrowed the gap against our larger competitors.

According to iResearch, our monthly unique visitors reached a 161 million in June, up to 11% from March, representing a penetration rate of 48.4%, up 7.3 percentage points from the previous quarter. I’d like to point out that our market penetration rate rose twice as fast as that of our current market leader. Our robust user growth is the direct result of our content strategy, which I’d like to provide a bit more color. First in China, industry practice is that the content is put out to the market six to 10 months prior to launch.

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